Ev Ehrlich's Everyday Economics

5Dec/111

Susan Crawford on the Digital Divide

Two weeks ago I ran a post about “Ten Buck Broadband” – a program out of the FCC to browbeat broadband providers into offering stripped-down, lost-cost wireline access to poor people who today don’t use broadband, even though they are "passed” by a broadband system. In summary, my argument was this: it’s all lovely, but it rests on the fundamental misconception that all broadband must be wireline. And in fact, for many poor and working people, wireless is a better option. It’s growing in speed and quality. It travels with you, which is very important if you move frequently, or more generally, if you don’t own your own home and you’re hesitant to sign a contract with a wireline service provider or if your landlord hasn’t sprung for installing the infrastructure. And thanks to blistering competition in the “cage match” among service, device, application, and content providers, the functionality of wireless is burgeoning – the tablet and WiFi speak to that.

But no sooner than the ink dried on that post – does ink dry on a post? – than yesterday’s New York Times gave an essay by broadband gadfly Susan Crawford prominent space somewhere between the sinking of the USS Maine and Men Walk on Moon. Susan’s essay – “The New Digital Divide” – argues that a new version of the “digital divide” is taking place in America. The old one, first identified by one-time Commerce Assistant Secretary Larry Irving, was the gap between those who had dial-up access and those who had none at all. But the new incarnation, as Crawford has it, is not between some access and none-at-all. It’s between “good” access – wireline – and “second-class” access – wireless.

Look, I know and like Susan Crawford, and once even commissioned her and a colleague to write a paper on Internet openness and the risks of overreaction to file-sharing and piracy. But I think she’s just flat-out wrong about the major points in her argument, and that, even if she were right, her ideas about what to do about it – admittedly, these are more telegraphed than laid out in detail – go off in the wrong direction.

There are many ways into Susan’s wormwood, but let me focus on three:

First, are we talking about the present or the future?

Second, where does economics fit into this?

And, third, what should we do about it?

The first issue is Susan’s frequent jumps in time frame in her essay. For example, here are a few quotes at the center of her argument:

As our jobs, entertainment, politics, and even health care move on-line, millions are at risk of being left behind.”

“Within a decade, patients at home will be able to speak to their doctors on-line…”

“Households will soon be able to monitor their energy use using smart-grid technology…”

“Soon, job interviews will be held by videoconference…”

You get my point. All of this stuff is just around the corner – in broadband world, we stand forever on the threshold of a dream. I don’t mean to disparage that; these fantastic services aren’t some kind of digital fusion power – you know, great stuff that will happen one day but that day isn’t soon. But Susan’s point can fairly be reduced to this – broadband connections on a smart phone won’t be able to do all this stuff.

Well, first, in many cases, I disagree. Not only can I, but I’d rather that my home’s energy use was monitored on a mobile device. In fact, I’m building a home right now and the vision is to control its energy use remotely from my phone – hell, the vision is to control the sound system remotely. And if their prospective pool of employers is using mobile devices, then I wager that employers will figure out how to hold remote job interviews on mobile devices.

But the larger fallacy is that Susan’s comparing what might happen to tomorrow to what exists today. It’s easy to spin out prospects for broadband-based services that might occur one day and compare them to a flip phone or even to a state-of-the-art smart phone. But doing that is like going back ten years and arguing that one day people will be able to search for data and images, and store music, and determine their location and the best route to where they’re going, and listen to entertainment or order a pizza, and watch videos or book an airline reservation on their computers, but they’ll never be able to do that on a wireless device because they’re just phones (and besides, they’re so little, how could you stick all that stuff in there?).

In fact, in writing off mobile devices, Susan misses entirely the real dynamics of the sector – the reality of “cage match” competition. Wireless capability is burgeoning, and wireless devices are now capable of doing things that were unimaginable five or ten years ago – watch videos, determine location, book a flight – because the wireless space is benefitting from this kind of remarkable competition. As signal gets bigger and better, devices get better to use the capabilities that better signal creates, and applications and capabilities grow to fill the better devices that better signal permits. I made this argument only recently using the
example of iPhone’s Siri. The reason why you can now talk to your phone – as opposed to through it – is not because we just figured out how to do voice recognition. Hell, you’ve been talking to that annoying female “welcome!” voice for years. It’s happening now because now wireless signal in The Cloud is good enough to support the rapid exchange of data between the phone you’re talking to and the big, hog-ass boxes with enough compute power to figure out what the hell you just said.

So by comparing what will be in the broadband world tomorrow to what wireless devices can do today, Susan constructs a scary story with no basis – in fact, mobile devices can already do more today than Susan seems to admit. Competition in the wireless “eco-system” –the cage match among signal providers, device manufacturers, and service and content providers -- is going nuts, as the phone in your pocket demonstrates, not to mention the tablet in your hands. And the underlying engineering and economics
in many respects favor the wireless side over the wireline side. For example, here’s Susan on why AT&T’s U-verse can’t compete with Verizon’s FiOS:

“…(U-verse) cannot provide comparable speeds because, while it uses fiber optic cable to reach neighborhoods, the signal switches to slower copper lines to connect to houses.”

Yes, that’s right – it costs a great deal of money to get the most out of fiber, right down to rewiring the connection from the pole to
your house and the wire in your walls. But mobile devices get better instantly – get a new one and turn it on. Which segues into the second point I’d make in criticizing Susan’s essay – where’s the economics? They’re missing at two levels.

The first is practical. As Susan notes, mobile broadband costs the consumer half of what wireline does. Yes, people who use it
may lose functionality, but usually consumers choose to do so because they’ve made a conscious decision. Wireline is great, so long as you have a computer and the software needed to use it, expect to live in a place long enough to justify the broadband contract and the transaction costs associated with buying it, and think that it’s incremental cost is justified by the added functionality. Many of those Susan would rescue from the wireless world chose to be there.

It’s all about what people “want.” A mobile phone connection isn’t as good as a wireline connection for the purposes of making a phone call, but millions of people are shifting from wireline to wireless telephony because they like mobility and will sacrifice other attributes to get it. (These, of course, are young people. As I and my hearing ages, I appreciate it when my kids call me on the landline so I can hear what the hell they’re saying, particularly since they invariably call me when walking or driving somewhere and the background noise sounds like it was recorded at Big Sur.) But there’s a big and important difference between what people want -- and need -- and what, in Susan’s view, they ought to have.

For example, Susan notes that “few people would start a business using only a wireless connection.” Really? Depending on what the business is, a tablet might be better than a wireline computer – it moves with you, it communicates adroitly, it’s “just like a computer.” And the functions that make many a new business want compute power – marketing information, logistics, CAD-CAM, document or spreadsheet functions – aren’t about communications so much as data crunching. Some people starting businesses would do fine with a wireless infrastructure, others won’t, but the way to sort this out is to let markets and those people decide, not to have Susan or anyone else announce that you have to have a wireline connection to start a business. Or apply for a job, or talk to a doctor.

And in a broad sense that’s what’s happening in Susan’s argument. Rather than let economic and markets work in broadband space and then deciding where we ought to complement those outcomes, Susan would rather impose the preferences of planners. Look, I’m a proponent of regulation where market-based outcomes don’t work – financial crises, greenhouse gasses, worker
safety, and so on, although there’s an entirely separate issue about how to achieve regulatory objectives – but in order to drag her argument through the Eye of the Needle and into the Kingdom of Heaven, Susan has to make the kind of statements that, first, confuse the present and future and, second, assume that consumers can’t work this out on their own terms.

Which leads to a kind of broadband effetery. Thirty years ago, when the “high performance workplace” was in vogue, I remember someone -- I think it was either the late and often-missed Bennett Harrison or the still-contemporary Dan Luria -- making the remark that the way to improve worker productivity was to dress them all up in white lab coats and send them back to work. And Susan seems to endorse a variant – that if we give everyone a 100 meg fiber connection, not to mention a garage, then they’ll all start H-P or Microsoft or whatever. But that’s not how things work. There are plenty of aspects of the broadband world that require some kind of social reconciliation – privacy and security, extending the network, and so on. But the idea that it has to be wired as opposed to wireless has no basis in economics or policy – it’s simply a vision that was arrived at without regard to cost, logistics, or what people appear to want. Gosh, I wish I could think of another word for it, but it’s just so bourgeois – this is what “the right people” want, and you should want it, too.

And that raises the third issue – even if Susan was right about everything, what would we do about it? Various hypotheses emerge in her writing. For example, after noting that the OECD ranks American 12th among the industrialized world for wired Internet
access (raising a separate question about the measurements), she states that “it is safe to assume that high prices have played a role in lowering our standing.” Similarly, FiOS “costs six tmes as much as comparable serviced in Hong Kong, five times as much as Paris, nd two and a half times as much as Amsterdam.” Well, there’s plenty of work that suggests that the people who don’t buy broadband even when they could are motivated by more than price – they fail to see the relevance, they see it as a distraction. Even if price were the only issue, the implication I get from this is that providers are price gouging. But it’s awfully hard to reconcile that view with the reality that the stocks of service providers such as Verizon and AT&T are listless while the stocks (or valuations) of companies that ride those providers – Google, Apple, Facebook, and so on – are soaring. If the problem were that broadband providers were the Standard Oil of signal, then wouldn’t we expect them to be valued as such? Instead, the reality is reminiscent of a complaint my then-boss, Jim Unruh, the CEO of Unisys, made to me one day twenty years ago; “Two companies make money every time we sell a computer. Unfortunately, they’re Intel and Microsoft.” He grimaced as he said it.

So what would Susan do to fix that – to use competition to force prices down by reducing profit margins (leaving aside whether that was the real issue, or even true)? Well, other countries “have required telecommunications providers to sell access to parts of their networks to their competitors at regulated rates, so that competition can lower prices.”

Here we get to the nub. Susan once favored the government building a national fiber network at taxpayer expense, a project that would have cost nigh on to half a trillion dollars, using the same thinking – that only fiber will do, and that the public sector has to do it. Now, with private investment continuing to pour into both wireline and wireless infrastructure, a nationalized fiber network seems a little silly, so she’s fallen back to “unbundling” – the idea that the Little Red Hens who build broadband infrastructure networks should be required by government to share it at government-set prices to the other critters who
would like to have some.

We tried this before, in the 1990s, and what we got was DSL, a result that Susan categorizes as follows, “And don’t even think about DSL, which carries just a fraction of the data needed to handle the services that cable users take for granted.”

I agree with Susan on this point – DSL is not remotely as good as fiber or cable. But what she fails to consider is that DSL is what we got when the policy she favors was actually implanted. All those DSL companies – Earthlink, Covad, those guys – existed because the policy at the time was that they could go to phone company networks and buy access at government-set prices, then resell the service. They were free riders who offered services after regulators invited them to the party; they all sold the same service, none of them innovated, none of them improved what they offered consumers. And this policy became the single greatest obstacle to developing new infrastructure – after all, if you have to share your facility with your competitor, not to mention at a price you don’t determine, then why the hell would you build new infrastructure in the first place? And, therefore, why innovate and improve the very broadband infrastructure with which Susan's not satisfied?

So Susan’s policy failed. When it was lifted, we got a new generation of infrastructure, and competition between fiber, cable, and wireless to bring signal to customers. Investment and innovation took off. And now that these investments have taken place, Susan wants to freeze the process again, compelling companies to share what they built and making sure, as a consequence, that they never make the mistake of building anything again. And what’s worse, at least you could argue that some of the old phone lines from the DSL days were built in the Ma Bell days of rate base regulation, and therefore under the expectation of a guaranteed, regulated return. Who guaranteed Verizon a return when it put out tens of billions of dollars for FiOS, or AT&T for U-verse, or the various cable companies, for that matter? We should be improving the incentives to build infrastructure, not obliterating them.

The transformative nature of broadband is undeniable. But that transformative nature is the flip side of technology and market structure that are changing and improving rapidly. The idea that wireline is good and wireless is second-class could be undone by events in a few short years. We have no idea what innovations – in signal, in devices, or in services – will come to pass in the next few years, much as we could not have predicted the state of today’s wireline/wireless balance a few years ago. Deciding which of these technologies “wins,” and then radically restructuring the industry to enforce that choice, is a bad idea, even if the intentions that gave rise to it – a concern for the social enfranchisement of poor and working people – are commendable.

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  1. Everett,

    Very interesting perspective and one that I whole-heartedly agree with. I am working with a client who has a sustainable model for introducing competitive wireless in rural markets and would like to chat with you. Do you have an email address that I can send some information?

    BTW, in 1997, as an industry analyst, I was loudly claiming that the Telecom Act was a well intentioned farce and it would presage an era of consolidation from 25 large players down to 3-5 “super networks”. As we’re at the end of that cycle you might be interested in my next 10-15 year prognostication(s).

    Best,
    Michael


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